Publication | ThinkSet

The Imperative of GHG Emissions Management for Natural Gas and LNG Supply Chains

Christopher Goncalves and Athanasia Arapogianni Konisti

Fall 2023

As decarbonization efforts evolve and ESG concerns pick up, natural gas and LNG stakeholders must focus on greenhouse gas emissions abatement.

In the twenty-first century, global decarbonization efforts in the power generation and industrial sectors have largely focused on fuel switching: increasing the use of cleaner natural gas, liquified natural gas (LNG), and renewable energy to replace coal and oil. North America and Europe have been at the forefront of these efforts. Over the last two decades, the share of coal usage for power generation has steadily decreased in North America (falling from 49 to 22 percent) and Europe (from 33 to 18 percent). In sharp contrast, the share of coal in Asian markets has increased from 63 to 71 percent.

Yet as renewables become more cost effective and accessible, decarbonization strategies and policies have begun to turn against natural gas and LNG. For example, the International Energy Agency (IEA) envisages a significant increase in the use of renewable energy, decreasing demand for natural gas, and diminished use of coal and oil over the next two to three decades. For natural gas to remain in the energy mix during the transition to a decarbonized world, even at the decreasing pace outlined in the IEA’s net-zero scenarios, greenhouse gas (GHG) emissions along its supply chain should decrease significantly. Indeed, the Intergovernmental Panel on Climate Change (IPCC) notes that reaching net-zero GHG emissions (NZE) will require deep reductions in CO2, methane (CH4), and other emissions.

This emerging state of play will create challenges for the natural gas industry. But for those who can abate GHG emissions successfully, it also presents substantial economic opportunities. Here’s what executives should know.

GHG Emissions Management in the Supply Chain Takes on Added Importance for Natural Gas ESG

From new penalties and incentives to expanding regulatory requirements and ESG standards, the supply chain GHG emissions intensity (EI) of natural gas companies is increasingly under the microscope—and becoming a critical source of commercial differentiation as a result.

Companies are becoming sensitive to measuring the climate impact of their energy sales and purchases at all stages of an energy supply chain for a variety of reasons:

  • Various taxes, fees, and penalties are expected to apply to the volume of GHG emissions in energy production, sale/purchase, and consumption/combustion activities—all of which will make lower EI supplies preferable to higher ones.

  • In Europe and other markets, energy and industrial products derived from fuel supplies are subject to increasing GHG fees such as the carbon prices of the European Union’s Emissions Trading System.

  • Companies’ upstream supply chains and downstream customer GHG EI are increasingly measured for purposes of corporate ESG goals and compliance, social license to operate, and debt- and equity capital-raising in private and public markets. Virtually all corporate sustainability reporting standards and initiatives (e.g., European Sustainability Reporting Standards (ESRS), International Financial Reporting Standards (IFRS), Securities and Exchange Commission (SEC)) require measurements of full supply chain GHG emissions. Major banks and financial institutions are also seeking to align their financing portfolios to global decarbonization targets(e.g., Carbon Compass from JP Morgan Chase & Co.).

  • GHG EI is increasingly critical to companies’ strategic goals and positioning among competitors. Notably, increased demand of “carbon-neutral” LNG forces buyers and sellers to demonstrate efforts to abate or offset emissions along their supply chains.

Fuel to Power Supply Chain: Natural Gas, LNG, and Coal

To decarbonize energy supply chains by reducing emissions (in addition to switching sources via electrification), it is important to evaluate the GHG EI of different sources of energy and promote the fuel supplies that exhibit lower GHG EI.

For instance, comparing the full supply chain GHG EI of natural gas, LNG, and coal supply chains requires evaluation of:

  • GHG EI in all parts of the supply chain for each different fuel:

    • upstream for production: gas production and coal mining

    • midstream for processing and transportation: pipeline transportation for gas; liquefaction, shipping, and regasification for LNG; and sea and/or land transportation for coal

    • downstream for power generation: gas and coal combustion

  • Both CO2 and CH4 emissions in a manner that considers the outsized climate impact of CH4. According to the IPCC, over a twenty-year timeframe the global warming potential (GWP) of a ton of CH4 emissions is 84 to 86 times higher than a ton of CO2

GWP is a measure of the heating radiative efficiency (or simply “warming power”) of a gas relative to CO2. The GWP reported is when considering climate carbon feedbacks. Climate carbon feedback refers to the effect that a changing climate has on the carbon cycle, which impacts atmospheric CO2, which in turn further changes the climate. As CO2 is emitted, the atmospheric CO2 pool increases. The oceans and terrestrial biospheres (carbon sinks) absorb a fraction of this additional CO2, but a fraction stays in the atmosphere and warms the climate. In turn, this warming climate slows the uptake of CO2 by the carbon sinks. This slowing-down constitutes a positive feedback impact (i.e., the warming climate feedback causes further warming).

Evaluation of GHG EI requires collection of data from emissions measurement campaigns, satellite emission data, and the use of relevant emission factors for equipment when applicable. It also requires rigorous analysis of the measurements to reach accurate conclusions.

For power generation in Europe, the results of a full supply chain comparison of the GHG EI of fuel supply, delivery, and combustion are striking:

  • LNG coming from the US exhibits the lowest GHG EI overall, followed by pipeline gas and coal.
  • Methane emissions dominate the upstream part of all supply chains and are present in the midstream part of LNG and pipeline gas, primarily due to leakages.
  • CO2 emissions are present in all parts of the supply chain but occur mostly during combustion for power generation.

Tackling GHG Abatement: A Vital Economic Opportunity

Given the mounting importance of GHG emissions abatement, governments—as well as natural gas and LNG buyers, sellers, and producers—are exploring ways to assign a “value” to CO2 and CH4 emissions levels at various points along the supply chain. For example, under the Methane Emissions Reduction Program in the US, methane emissions will be charged at $900 per ton in 2024, increasing to $1,200 per ton in 2025, and $1,500 from 2026 onward.

Avoiding such costs using GHG abatement strategies presents an enormous opportunity. Case in point: CH4 abatement costs in natural gas supply chains are approximately $0.2/MMBtu, far lower than potential CH4 penalties, which are in a range of $2 to $4/MMBtu. Further, this does not consider the additional revenue from selling saved CH4 in the market, at prices that can range from as low as $2 to over $10/MMBtu depending on the market of sale and CH4 savings. (Estimates of prospective GHG emissions fees are based on a CO2 price of $135/tCO2 (Global Energy and Climate Model Documentation, 2022; IEA, 2022). CH4 abatement costs represent average upstream and downstream abatement costs from IEA methane abatement. Carbon capture, usage, and storage (CCUS) costs represent costs at the point of power generation: 75$/tCO2 for coal-fired electricity generation and 100$/tCO2 for gas-fired generation, respectively.)

Similarly, CO2 abatement costs are lower than potential penalties as carbon capture, utilization, and storage technologies have started to reach economies of scale, offering solutions to minimize emissions. A market for captured CO2 is forming too, as these emissions can be used in many ways, including for enhanced oil recovery and conversion into chemicals or other fuels.

The bottom line? Now is the time for natural gas and LNG buyers, sellers, and producers to home in on GHG emissions measurement and abatement—not only to meet new compliance standards, but to avoid penalties, generate revenue, and gain a vital competitive advantage.

BRG Experts

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Christopher Goncalves

Managing Director

Washington, DC

Athanasia Arapogianni Konisti

Associate Director